Here's Why We're Not At All Concerned With Sun Pharma Advanced Research's (NSE:SPARC) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Sun Pharma Advanced Research (NSE:SPARC) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Sun Pharma Advanced Research

How Long Is Sun Pharma Advanced Research's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. Sun Pharma Advanced Research has such a small amount of debt that we'll set it aside, and focus on the ₹4.0b in cash it held at March 2023. Importantly, its cash burn was ₹845m over the trailing twelve months. Therefore, from March 2023 it had 4.8 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Sun Pharma Advanced Research Growing?

Sun Pharma Advanced Research managed to reduce its cash burn by 65% over the last twelve months, which suggests it's on the right flight path. And there's no doubt that the inspiriting revenue growth of 74% assisted in that improvement. Overall, we'd say its growth is rather impressive. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Sun Pharma Advanced Research is building its business over time.

Can Sun Pharma Advanced Research Raise More Cash Easily?

We are certainly impressed with the progress Sun Pharma Advanced Research has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Sun Pharma Advanced Research has a market capitalisation of ₹68b and burnt through ₹845m last year, which is 1.2% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Sun Pharma Advanced Research's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Sun Pharma Advanced Research is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Sun Pharma Advanced Research has 2 warning signs (and 1 which is significant) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.